In the rapidly changing world of financial services, payment processors, money transmitters, and other fintech businesses are grappling with an increase in regulatory scrutiny and consumer expectations. Troutman Pepper’s dedicated Payments team is actively engaged in addressing these challenges, providing legal support to clients throughout their business cycles.

The Absolute Priority Rule, as outlined in Section 1129(b)(2) of the Bankruptcy Code, plays a crucial role in Chapter 11 bankruptcy cases. It stipulates that claims of a higher priority must be paid in full before lower priority claims can receive any recovery. This rule also requires that all creditors must be paid in full before equity interest holders can retain any interest in the debtor or receive any distribution under the plan. The priority of a creditor’s claim, therefore, determines the extent to which they can expect to be paid under a confirmed Chapter 11 plan.

The Bankruptcy Code’s Section 547(b) allows a trustee or debtor in possession to recover property transferred to a creditor, known as a preference action. However, the Code also provides defenses to a preference action, including the ordinary course of business defense.

Selling a claim in a bankruptcy case can offer several advantages. It provides an opportunity for immediate payment, which can be beneficial as the resolution of claims in bankruptcy cases can often take months or even years. Selling also ensures payment in cash, eliminating the risk of receiving other forms of distributions such as stock or promissory notes. Additionally, it guarantees a certain amount, removing the uncertainty that often comes with bankruptcy distributions. Lastly, selling a claim can save time and expense as it eliminates the need to monitor the bankruptcy case or hire an attorney to protect your rights.

This article, part of our Creditor’s Rights Toolkit series, serves as an essential guide for vendors navigating the complex landscape of dealing with financially distressed or bankrupt customers. It provides a detailed exploration of the options available to vendors who are proactive and quick to act when they learn of their customer’s financial woes.